New From Sprott: "Do Western Central Banks Have Any Gold Left?, Part III"

Thu, Jul 18, 2013 - 12:08pm

Hot on the heels of the excellent research paper released Tuesday, the good folks at Sprott Asset Management have sent out their latest monthly newsletter.

First of all, if you haven't read the Sprott research report that we linked back on Tuesday, you should do so right now. It's an excellent analysis of where we are and how we got here:

This current newsletter attempts to answer the question: Do the Western CBs have any gold left or has it all been leased and sold by the Bullion Banks, never to be returned. In exchange, the CBs are left simply holding paper claims on every other unallocated account holder. Before you begin, perhaps you should go back and watch Part 3 of the CBC documentary, "The Secret World of Gold", coincidentally featuring Eric Sprott, himself. Again, after years of leasing, is the central bank gold gone? The Bullion Banks have tried to manage this process by matching lease durations and repurchases but, with Eastern demand far outpacing current supply, will the Banks be able to physically reclaim the Central Banks gold in the future? Is it "Gone For Good"?

Again, the Sprott folks will be happy to send these newsletters to you directly so that you don't have to wait for me to post them. To sign up, just click here:


Do Western Central Banks Have Any Gold Left?, Part III


Recent dramatic declines in gold prices and strong redemptions from physical ETFs (such as the GLD) have been interpreted by the financial press as indicating the end of the gold bull market. Conversely, our analysis of the supply and demand dynamics underlying the gold market does not support this interpretation. Many major buyers of gold are adding to their stocks, while at the same time supply is flat or even decreasing, compounding an already vast imbalance.

For example, central banks from the rest of the world (i.e. Non-Western Central Banks) have been increasing their holdings of gold at a very rapid pace, going from 6,300 tonnes in Q1 2009 to more than 8,200 tonnes at the end of Q1 2013 (Figure 1a). At the same time, physical inventories have declined rapidly since the beginning of 2013 (Figure 1b) (or have been raided, as we argued in the May 2013 Markets at a Glance)1 and physical demand from large (Figure 1c) and small (Figure 1d) scale buyers remains solid.

As we have shown in previous articles, the past decade has seen a large discrepancy between the available gold supply and sales.2 The conclusion we have reached is that this gold has been supplied by Central Banks, who have replaced their holdings of physical gold with claims on gold (paper gold).

Many recent events suggest that the Central Banks are getting close to the end of their supplies and that the physical market for gold is becoming increasingly tight.



Source: World Gold Council, Bloomberg, Hong Kong Census and Statistics Department. Average premium calculated as the average premium for the following 1 oz. coins, as reported by the Certified Coin Exchange (CCEX): American Eagle, Maple Leaf, Krugerrand, Philharmonic, Panda, Isle of Man and Kangaroo.

Supply & Demand Factors

First, in January, the German Bundesbank (the second largest gold reserve in the world according to the International Monetary Fund (IMF) data), announced that they would repatriate their gold from the New York Fed’s vaults.3 In total, 300 tonnes out of the 6,200 tonnes the New York Fed claims to hold should be relatively easy to transfer.4 But the Bundesbank also announced that it would take about seven years to do so. If the gold is really there, it should not take much time to transfer a paltry 4.8% of the New York Fed’s vault.

Next, in March, there was the leaked letter from ABN Amro (a large Dutch bank) telling its bullion customers that redemption of physical gold from their allocated accounts would now be impossible.5 Then, in April, we heard reports that UBS and Scotiabank were experiencing a “bullion depositor run”, where customers were lining up to withdraw their gold.6 Finally, a few days later, we heard from Jim Sinclair that allocated gold deposits held in Swiss banks could not be withdrawn on the basis of directives from the central bank.7

Why would a bank do that if it indeed had their customer’s gold in the vaults?

Lastly, on July 1st we learned that delivery times at the London Metals Exchange were as high as 100 days.8 All these events strongly support the thesis that the strong physical demand we have seen over the past few years is putting ever increasing strains on the Central and bullion banks.

Reaction from central planners

Against all odds, the price of gold has experienced a large decline over the past few months, only slightly recovering over the past two weeks or so. Given the strong physical demand and the lack of available supply, we think that this decline was engineered by central and bullion banks to increase available supply and decrease demand. They flooded the COMEX (paper market), only to then free-up physical gold from the various available sources at depressed prices (see our discussion of this topic in the May 2013 Markets at a Glance).

This has been manifested in the GLD trust and the COMEX inventories (see Figure 1b). Since the beginning of the year, and well before the April crash, one of the largest repositories of physical gold, the GLD trust, has seen redemptions of more than 300 tonnes of gold (Figure 2), while world mine production (excluding Russia and China) is approximately 2,300 tonnes a year.9


Source: SPDR Gold Trust.


Source: Bloomberg, CFTC.

If our thesis is correct, the Central Banks are running out of gold. What would happen if the world found out? This can’t be allowed, so the only option left for central planners is to try to tame the demand for gold.

These events have been met with some concerted reactions from the authorities.

First, in early April, the large commercial banks, who are also active participants in the various gold markets, started recommending that their clients sell gold, saying the metal was overpriced, while at the same time covering their own shorts in record amounts (Figure 3). Simultaneously, we have also seen a record amount of short interest from speculators (non-commercial participants) (Figure 3). More recently there was the talk of tapering by Fed officials that further precipitated the remaining long speculators to sell their positions. Finally, the Indian Central Bank decided, supposedly to reduce their trade deficit, to increase the gold import duty to 8% to try to tame demand (the third increase in 18 months).10,11 Then, they imposed further restrictions, such as a tightening of bank credit for bullion importers and limitations on credit card purchases of gold.12,13 Those restrictions were interpreted as negative for gold, even though Indians will certainly exploit non-official channels to get their hands on the precious metal (see our Sprott’s Thoughts article on the subject: “Silver is winning India’s “War on Gold””).


Suddenly, in a very short period of time, all the stars got aligned by the central planners to depress the price of gold. All that was needed was a few big moves in the paper market to finish the job. As Figure 4 shows, the enormous volume experienced on the largest down days have been highly suspect and unusual. For example, when gold declined more than 9% in April, the total amount of paper gold traded that day was 82% of average annual mine supply and more than 4.3 times the average volume of a normal day. A closer analysis of the tape for those days shows that what drove the price down was a few, very large sell orders on the COMEX. This further hints at price manipulation since a normal trader wanting to close a position would never send the whole order all at once, for fear of moving the market.


To further support our price manipulation hypothesis, we overlay the 1-month GOFO rate (Gold Forward Offered Rate, the interest rate on a loan collateralized by gold) with days where the gold price suffered significant declines (more than 3%) in Figure 5. Unless it is the actual price drop that sparks all this increased demand, it seems counterintuitive that the gold price would decline precipitously before large declines in the GOFO rate, which implies increased demand for physical gold from bullion dealers.

It now seems that bullion banks are in desperate need of bullion, as evidenced by the increasingly negative GOFO rates we are seeing (Figure 5) and the backwardation in the futures market (future gold is sold to a discount to current gold). Remember that a negative GOFO rate signifies that the bullion banks are ready to pay holders of physical to lease their gold, in this case for a month. Historically, negative GOFO rates have happened in very few occurrences. The last one was in November 2008, at the height of the financial crisis and after which gold rose 156% from through-to-peak. Before that, we saw negative GOFO rates in March of 2001 (about the start of the bull market) and September of 1999 (for a thorough discussion of these issues, see the Sprott’s Thoughts article: “Central Banks, Bullion Banks and the Physical Gold Market Conundrum”).

To recap, we believe that the central planners have engineered the recent gold drawdown in the following way:

  • Brokers recommend their clients to sell gold,
  • The same brokers cover their short positions on the COMEX,
  • While the GLD and the COMEX inventories suffer large redemptions/deliveries,
  • Taper talk crashes the gold price,
  • And India cooperates with other central planners to decrease physical demand.


  • Record speculator (i.e. hedge funds) short positions,
  • The GOFO rate goes negative,
  • Futures markets go into backwardation,
  • Physical inventories stand at record lows,
  • And a recant on taper.


This was all orchestrated to increase supply and tame demand. We believe that central planners are now running out of options to suppress the gold price. After taking a pause, the secular gold bull market is set to continue.

1,-o... bullish-for-gold/
2 gold-left/ gold-left-part-ii/
3 tons-of-gold-to-germany-by-2020.html
4 forassets20130630.htm
6 Massive_Run_On_Physical_Gold_%26_Silver_At_UBS_%26_Scotiabank.html
7 Sinclair_-_Swiss_Bank_Just_Refused_To_Give_My_Friend_His_Gold.html
8 where-wait-is-100-days.html
9 Mine supply estimate supplied by World Gold Council; YTD gold mine production data suggests that total 2012 gold mine supply will come in lower around 2,300 tonnes, ex Russia and China production. In addition, Frank Veneroso has recently published a new report that warns that the supply of recycled scrap gold could drop significantly going forward due to the depletion ofthe inventories of industrial scrap and long held jewelry over the past decade. See June 2013 Markets at a Glance: banks-have-any-gold-left/
10 in-june-analysts-expected-recovery/
11 88.html
13 32399/

About the Author

turd [at] tfmetalsreport [dot] com ()


Jul 18, 2013 - 12:11pm


#1 ?


Chi-Town Deadhead
Jul 18, 2013 - 12:17pm


I'm still in the money for my owner

Jul 18, 2013 - 12:18pm

China reportedly planning to back the yuan with gold

Recent media reports suggest that Beijing is considering backing the yuan with gold. This decision, if taken, will likely affect China's economy and may trigger a new wave of the global economic crisis. For Russia, however, such a scenario may have its benefits. Pin It Pin It Source: AP

According to media reports of early July, the People's Bank of China is mulling the possibility of phasing out the dollar as the reference currency for the yuan exchange rate, and to start using gold as the reference point.

The reports have not been confirmed officially, but analysts are warning that the step, if taken, will weaken the yuan and destabilise China's already troubled economy, ultimately provoking a new bout of the economic crisis worldwide.

Beijing's possible move to back the yuan with gold would not be meant as a strategic measure to strengthen the national currency and increase its attractiveness as an investment medium. Rather, it would be a flaunt aimed at demonstrating to the world (and to the USA in particular) that China is capable of taking the risks associated with a departure from the dollar standard. Experts warn however that, apart from benefiting no-one, such a decision may actually have catastrophic consequences.

John Galt
Jul 18, 2013 - 12:24pm

@ Alien

Yep, you are first. Congrats!

I was a little startled to see a Turd post with no comments, then realized my near miss.

Jul 18, 2013 - 12:25pm


Great work Sprott! Battle this sham by good hard facts and logic. Stuff rarely seen on Wall and Bay Street. They can do voodoo in the short term but this thing will turn and it will be big. The thing that is beyond smelly is the Dow/SP keep rising yet the fundamentals keep deteriorating. PM's keep falling yet the fundamentals keep strengthening. Intervention???

Jul 18, 2013 - 12:28pm

rrr I'd be Turd!

ya baby

Quite surprised on the unrealized easy reasone for abeatdown today with the employment numbers that were realization of economy stagnation the average for 2013 >348.57 TODAY 334. While the BS ers say it is a large drop .

Some reality is starting to work its way into the news with topics that we are all familiar with

1) the physical buying is far above and in contrary to the futures and paper market and is adding support to the price

2) multiple supports for the fact that China has a massive amount of gold and that they are perhaps going to us it to support their currency and the concept that China's currency will soon be a option for settlement in international accounts with trading centers in TORONTO SWITZERLAND.

3) Bonds are the kindling that will ignite the massive inflation that is being artificially kept under control and are showing that no matter what the Feds try to do the yields are rising.

Jul 18, 2013 - 12:29pm

No, kidding? Really???

Gee.....where have I heard that before?

Jul 18, 2013 - 12:29pm


Not sure frequently making the top ten is a good thing. In my case it simply means I don't have a lot going on.

Jul 18, 2013 - 12:30pm


Still learning

Jul 18, 2013 - 12:31pm

GLD:USO ratio

The GOLD/OIL ratio or GLD/USO just hit major support from August 2010 and April 2011 around the 3.24 area. When it was last at this area in April 2011 it was setting up to spike to 5.65 by August 2011. Deja Vu? That reminds me of the movie Top Secret. Chocolate Mouse...etc...

Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

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Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
9/24 10:00 ET Consumer Confidence
9/26 8:30 ET Q2 GDP third guess
9/27 8:30 ET Durable Goods
9/27 8:30 ET Pers Inc and Cons Spend
9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
9/5 10:00 ET Factory Orders
9/6 8:30 ET BLSBS

Key Economic Events Week of 8/26

8/26 8:30 ET Durable Goods
8/27 9:00 ET Case-Shiller Home Price Idx
8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

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